Ispat/Inland Deal Promises Lower Costs--Cheaper raw materials key to strategy

Daimler-Benz AG isn't the only major European company that's caused a stir recently by going shopping in the U.S. Ispat International NV, a major global steel company based in the Netherlands, created a furor last March with its purchase of Inland Steel Co., one of the industry's largest integrated steel producers.

The investment is small compared to the DiamlerChrysler deal - only $1.43 billion - but its impact on the steel industry is similar to what's going on in Detroit: everything is being looked at differently, and everyone is asking: "Who's next?"

As in the Detroit merger, shareholders and Wall Street have reacted favorably to the Ispat/Inland deal, with shares of other American steel companies rising on the possibility of further takeovers in the U.S. But even the most die-hard residents of the rust belt now must face the somewhat scary realization that - like it or not - they have to start living with the concept of a global economy. Ispat's parent company, LNM Group, has production facilities in far-flung locations such as Indonesia and the former Soviet republic of Kazakhstan. An Indian citizen based in London, England, runs it.

Nevertheless, don't expect to hear a lot of Pat Buchanan-like whining about the selling out of America from folks in the steel industry. They've seen enough rough times in the last few decades that a benevolent takeover making Inland part of the fastest growing steelmaker in the world is unlikely to get them too worked up.

Between 1980 and 1992, U.S. steel producers reduced their capacity by 30%. Since 1965, more than 400,000 steel industry jobs have been eliminated. Now that's scary.

"In evaluating strategic alternatives for increasing shareholder value, it became clear that steel companies with an international production capability and global market reach will have a major edge over other producers," Robert J. Darnall, chairman of Inland says in a statement. Mr. Darnall will become head of Ispat's North American operations.

Mr. Darnell's statements ring especially true now that General Motors Corp. reportedly is opening up its steel contracts to competitive bids in a move designed to put the squeeze on U.S. steel producers. GM is the auto industry's single biggest customer with annual purchases of more than $5 billion. Last March it reportedly began inviting dozens of international steelmakers to presentations on global bidding changes.

"We intend to invest in Inland's assets to further maximize its production capacities to fully realize its potential. We also believe that Ispat International's size, global reach and expertise will allow us to work together to enhance Inland Steel Co.'s global competitive position," says Lakshmi N. Mittal (pronounced, appropriately enough, as "metal"), Ispat's founder and chairman.

Mr. Mittal began his career working in the family's steelmaking business in India, and has more than 25 years' experience in the steel and related industries. He left the family-owned mills in the 1980s to put together Ispat, which in the past six years has acquired steel mills in Germany, Trinidad, Mexico, Ireland and Canada, turning each one around by upgrading facilities, increasing capacity utilization and cutting production costs. It has used the same formula for success at each new facility.

A big part of Ispat's cost-cutting strategy is the use of direct-reduced iron (DRI) for steel production instead of the steel scrap used by minimills. Company officials don't give lots of detail about what DRI is, but apparently it is a special internal iron-ore processing technique that provides a raw material less expensive than steel scrap and not as easily copied by competitors.

Steven J. Bowsher, vice president-sales and marketing for Inland Steel Flat Products Co., says there's nothing wrong with making steel from scrap, but the pricing can be unpredictable when demand is high.

Ispat, in fact, claims that the average cost of DRI is about $95 per ton, while high-quality scrap used by traditional minimills costs $155 per ton, obviously giving it a substantial pricing advantage.

This, of course, is one area where the deal definitely is different from DaimlerChrysler: In this case the European company has plenty of cost-reduction know-how.

Knowing how to cut costs without chopping heads is good news to any salesman, anywhere, and Mr. Bowsher is no exception. "Ispat is pretty exciting for us," he says.

Lower cost PM Hoeganaes Corp. is introducing a new powder metal that contains significantly less molybdenum as its primary alloy while still providing a high degree of compressibility. The new powder's lower molybdenum content means a cost savings for processors, says Dennis M. Jackson, vice president-sales and marketing. The new powder, named Ancorsteel 50 HP, should be commercially available in June.

Mag gets a boost Chrysler Corp. reportedly will use magnesium cam covers for its new 4.7L V-8 truck engines due out later this year. Although the cam covers weigh only about 1.5 lbs. each, they represent a shot in the arm for magnesium, which averages about 6 lbs. per car. Engineers say the lightweight metal beat out plastic for the application.

Mag grows globally Magnesium is scoring big gains in global shipments, North American consumption and automotive applications, but Russian, Chinese and Ukrainian producer/exporters are grabbing all the growth, American Metal Market reports. Magnesium exports from Russia, China and Ukraine accounted for 25.4% of all shipments tallied by the International Magnesium Association (IMA) in the first quarter of this year, up substantially from the previous quarter and 1997 as a whole. A 3% to 4% drop in price backs the aggressive marketing from the three countries.

QMP buys German Metal Powder Unit Quebec Metal Powders Ltd. is acquiring the metal powder business of the German company Mannesmann. QMP says the German manufacturing facilities and distribution network will help improve response time to customers in Europe by providing local access to powder production, blending equipment and laboratory and customer-support services.